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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



FOR THE TRANSITION PERIOD FROM             TO



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Commission File Number 0-23223



CURAGEN CORPORATION

(Exact name of registrant as specified in its charter)



|Delaware (State or other jurisdiction of incorporation or organization) |  | 06-1331400 (I.R.S. Employer Identification No.)
|----------------------------------------------------------------------- |  | -----------------------------------------------



|555 Long Wharf Drive, 11th Floor, New Haven, Connecticut (Address of principal executive office) |  | 06511 (Zip Code) |  | 
|------------------------------------------------------------------------------------------------ |  | ---------------- |  | 



Registrants
telephone number, including area code:    (203) 401-3330



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act)

Yes  x    No ̈



The number of shares outstanding of the Registrants common stock as of August 1, 2003 was 49,526,310.



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CURAGEN CORPORATION AND SUBSIDIARY

FORM 10-Q

INDEX



|PART I.   Financial Information |  | Page   
|------------------------------- |  | -------
|                                |  |        
|                                |  | Item 1.
|                                |  |        
|                                |  |        
|                                |  |        
|                                |  |        
|                                |  |        
|                                |  |        
|                                |  |        
|                                |  |        
|                                |  |        
|                                |  | Item 2.
|                                |  |        
|                                |  | Item 4.
|                                | 
|PART II. Other Information      |  |        
|                                |  |        
|                                |  | Item 4.
|                                |  |        
|                                |  | Item 6.
|                                |  |        
|Signature                       |  |        
|                                |  |        
|Exhibit Index                   |  |        





|
|

|
|

|
|





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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)



|                                                                                                                                    |  | June 30, 2003 |          |   | December 31,2002 |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | -
|                                                                                                                                    |  | (unaudited)   |          |   |                  |  
|ASSETS                                                                                                                              |  |               |          |   |                  |  
|Current assets:                                                                                                                     |  |               |          |   |                  |  
|Cash and cash equivalents                                                                                                           |  | $             | 61,314   |   |                  | $
|Short-term investments                                                                                                              |  |               | 132,027  |   |                  |  
|Marketable securities                                                                                                               |  |               | 185,249  |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Cash and investments                                                                                                                |  |               | 378,590  |   |                  |  
|Income taxes receivable                                                                                                             |  |               | 1,503    |   |                  |  
|Other current assets                                                                                                                |  |               | 136      |   |                  |  
|Prepaid expenses                                                                                                                    |  |               | 2,893    |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Total current assets                                                                                                                |  |               | 383,122  |   |                  |  
|Property and equipment, net                                                                                                         |  |               | 23,932   |   |                  |  
|Other assets                                                                                                                        |  |               | 222      |   |                  |  
|Intangible assets, net                                                                                                              |  |               | 3,110    |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Total assets                                                                                                                        |  | $             | 410,386  |   |                  | $
|                                                                                                                                    |  |               |          |   |                  |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |  |               |          |   |                  |  
|Current liabilities:                                                                                                                |  |               |          |   |                  |  
|Accounts payable                                                                                                                    |  | $             | 4,380    |   |                  | $
|Accrued expenses                                                                                                                    |  |               | 2,586    |   |                  |  
|Accrued payroll and related items                                                                                                   |  |               | 2,220    |   |                  |  
|Interest payable, short-term                                                                                                        |  |               | 3,750    |   |                  |  
|Deferred revenue                                                                                                                    |  |               | 2,318    |   |                  |  
|Current portion of obligations under capital leases                                                                                 |  |               | 698      |   |                  |  
|Other current liabilities                                                                                                           |  |               | 3,759    |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Total current liabilities                                                                                                           |  |               | 19,711   |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Long-term liabilities:                                                                                                              |  |               |          |   |                  |  
|Convertible subordinated debt                                                                                                       |  |               | 150,000  |   |                  |  
|Obligations under capital leases, net of current portion                                                                            |  |               |         |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Total long-term liabilities                                                                                                         |  |               | 150,000  |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Commitments and contingencies                                                                                                       |  |               |          |   |                  |  
|Minority interest in subsidiary                                                                                                     |  |               | 7,301    |   |                  |  
|Stockholders equity:                                                                                                               |  |               |          |   |                  |  
|Common Stock; $.01 par value, issued and outstanding 49,519,539 shares at June 30, 2003, and 49,362,463 shares at December 31,
2002 |  |               | 495      |   |                  |  
|Treasury Stock, at cost; none at June 30, 2003 and 12,500 shares at December 31, 2002                                               |  |               |         |   |                  |  
|Additional paid-in capital                                                                                                          |  |               | 484,412  |   |                  |  
|Accumulated other comprehensive income                                                                                              |  |               | 3,696    |   |                  |  
|Accumulated deficit                                                                                                                 |  |               | (254,564 | ) |                  |  
|Unamortized stock-based compensation                                                                                                |  |               | (665     | ) |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Total stockholders equity                                                                                                          |  |               | 233,374  |   |                  |  
|                                                                                                                                    |  |               |          |   |                  |  
|Total liabilities and stockholders equity                                                                                          |  | $             | 410,386  |   |                  | $
|                                                                                                                                    |  |               |          |   |                  |  



See accompanying notes
to condensed consolidated financial statements





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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                        |  | Three Months EndedJune 30, |         |   | Six Months Ended June 30, |  
|--------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | -
|                                                                                        |  | 2003                       |         |   | 2002                      |  
|Revenue:                                                                                |  |                            |         |   |                           |  
|Collaboration revenue                                                                   |  | $                          | 1,695   |   |                           | $
|                                                                                        |  |                            |         |   |                           |  
|Total revenue                                                                           |  |                            | 1,695   |   |                           |  
|                                                                                        |  |                            |         |   |                           |  
|Operating expenses:                                                                     |  |                            |         |   |                           |  
|Research and development                                                                |  |                            | 18,388  |   |                           |  
|General and administrative                                                              |  |                            | 4,823   |   |                           |  
|Restructuring and related charges                                                       |  |                            | 2,888   |   |                           |  
|                                                                                        |  |                            |         |   |                           |  
|Total operating expenses                                                                |  |                            | 26,099  |   |                           |  
|                                                                                        |  |                            |         |   |                           |  
|                                                                                        |  |                            |         |  
|Loss from operations                                                                    |  |                            | (24,404 | ) |                           |  
|Interest income                                                                         |  |                            | 2,078   |   |                           |  
|Interest expense                                                                        |  |                            | (2,464  | ) |                           |  
|                                                                                        |  |                            |         |   |                           |  
|Interest income (expense), net                                                          |  |                            | (386    | ) |                           |  
|                                                                                        |  |                            |         |   |                           |  
|                                                                                        |  |                            |         |  
|Loss before income taxes and minority interest in subsidiary loss                       |  |                            | (24,790 | ) |                           |  
|Income tax benefit (expense)                                                            |  |                            | (117    | ) |                           |  
|Minority interest in subsidiary loss                                                    |  |                            | 1,480   |   |                           |  
|                                                                                        |  |                            |         |   |                           |  
|Net loss                                                                                |  | $                          | (23,427 | ) |                           | $
|                                                                                        |  |                            |         |   |                           |  
|Basic and diluted net loss per share                                                    |  | $                          | (0.48   | ) |                           | $
|                                                                                        |  |                            |         |   |                           |  
|Weighted average number of shares used in computingbasic and diluted net loss per share |  |                            | 49,234  |   |                           |  
|                                                                                        |  |                            |         |   |                           |  



See accompanying notes
to condensed consolidated financial statements.



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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  | Six Months EndedJune 30, |        
|--------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                            |  | 2003                     |        
|Cash flows from operating activities:                                       |  |                          |        
|Net loss                                                                    |  | $                        | (39,569
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                          |        
|Depreciation and amortization                                               |  |                          | 4,140  
|Non-monetary compensation                                                   |  |                          | 487    
|Stock-based 401(k) employer plan match                                      |  |                          | 423    
|Minority interest                                                           |  |                          | (2,829 
|Changes in assets and liabilities:                                          |  |                          |        
|Income taxes receivable                                                     |  |                          | 856    
|Other current assets                                                        |  |                          | 139    
|Prepaid expenses                                                            |  |                          | 512    
|Other assets                                                                |  |                          | (3     
|Accounts payable                                                            |  |                          | 1,954  
|Accrued expenses                                                            |  |                          | 47     
|Accrued payroll and related items                                           |  |                          | (80    
|Deferred revenue                                                            |  |                          | (292   
|Other current liabilities                                                   |  |                          | 2,301  
|                                                                            |  |                          |        
|Net cash used in operating activities                                       |  |                          | (31,914
|                                                                            |  |                          |        
|Cash flows from investing activities:                                       |  |                          |        
|Acquisitions of property and equipment                                      |  |                          | (3,278 
|Payments for intangible assets                                              |  |                          | (491   
|Repayment of loan from employee                                             |  |                          | 17     
|Net inflows from purchases and maturities of short-term investments         |  |                          | 66,274 
|Net outflows from purchases and maturities of marketable securities         |  |                          | (36,803
|                                                                            |  |                          |        
|Net cash provided by (used in) investing activities                         |  |                          | 25,719 
|                                                                            |  |                          |        
|Cash flows from financing activities:                                       |  |                          |        
|Payments on capital lease obligations                                       |  |                          | (1,076 
|Payments of financing costs                                                 |  |                          | (12    
|Proceeds from exercise of stock options                                     |  |                          | 197    
|Payments of stock issuance costs                                            |  |                          | (1     
|                                                                            |  |                          |        
|Net cash used in financing activities                                       |  |                          | (892   
|                                                                            |  |                          |        
|Net decrease in cash and cash equivalents                                   |  |                          | (7,087 
|Cash and cash equivalents, beginning of period                              |  |                          | 68,401 
|                                                                            |  |                          |        
|Cash and cash equivalents, end of period                                    |  | $                        | 61,314 
|                                                                            |  |                          |        
|Supplemental cash flow information:                                         |  |                          |        
|Interest paid                                                               |  | $                        | 4,562  
|                                                                            |  |                          |        
|Income tax benefit payments received                                        |  | $                        | 862    
|                                                                            |  |                          |        



See accompanying notes
to condensed consolidated financial statements



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CURAGEN CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



1.    Basis of Presentation



The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly our consolidated financial position, results of operations and cash flows. Interim results are not necessarily
indicative of the results that may be expected for the entire year. The condensed consolidated financial statements of CuraGen Corporation and subsidiary (the Company) include CuraGen Corporation (CuraGen) and our
majority-owned subsidiary, 454 Corporation (currently doing business as 454 Life Sciences, or 454), and accordingly, all material intercompany balances and transactions have been eliminated.



The June 30, 2002 and December 31, 2002 condensed
consolidated financial statements have been reclassified to conform to the classifications used in 2003. All dollar amounts in tabular presentations are shown in thousands, except par value and per share data.



The accompanying condensed consolidated financial statements
should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.



2.    Comprehensive Loss



Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130) requires reporting and displaying of comprehensive income and its components. In accordance with SFAS 130, the accumulated balance of other comprehensive income is disclosed as a
separate component of stockholders equity and is composed of unrealized gains and losses on marketable securities.



A summary of total comprehensive loss is as follows:



|                           |  | Three Months EndedJune 30, |        |   | Six Months Ended June 30, |  
|-------------------------- |  | -------------------------- | ------ | - | ------------------------- | -
|                           |  | 2003                       |        |   | 2002                      |  
|Net loss                   |  | $                          | 23,427 |   |                           | $
|Other comprehensive income |  |                            | (58    | ) |                           |  
|                           |  |                            |        |   |                           |  
|Total comprehensive loss   |  | $                          | 23,369 |   |                           | $
|                           |  |                            |        |   |                           |  



3.    Stock-Based Compensation



In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123),
which was effective beginning January 1, 1996. SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and non-employees and encourages (but does not require) compensation cost to be measured based on the fair
value of the equity instruments awarded to employees. Companies are permitted to continue to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), which recognizes compensation
cost based on the intrinsic value of the equity instruments awarded. The Company will continue to apply APB 25 to its stock-based compensation awards to employees.



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In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of SFAS 123 (SFAS 148). SFAS 148 permits two additional transition methods for entities that voluntarily change to the fair value based
method of accounting for stock-based compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. SFAS 148 became effective for financial statements issued after December 15, 2002, and the adoption of SFAS 148 did not have a material effect on the Companys
financial statements, as it has not adopted SFAS 123.



Had compensation cost for the Companys stock option plans been determined in accordance with SFAS 123, net loss and net loss per share would have approximated the pro forma amounts shown below for each of the three and six month
periods ended June 30, 2003 and 2002.



|                                                                                                    |  | Three Months EndedJune 30, |        | Six Months Ended June 30,
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | -------------------------
|                                                                                                    |  | 2003                       |        |                          
|Net loss, as reported                                                                               |  | $                          | 23,427 |                          
|Stock-based employee compensation expense included in net loss                                      |  |                            | (231   | )                        
|Total stock-based employee compensation expense determined under Black-Scholes option pricing model |  |                            | 3,100  |                          
|                                                                                                    |  |                            |        |                          
|Pro forma net loss                                                                                  |  | $                          | 26,296 |                          
|                                                                                                    |  |                            |        |                          
|Basic and diluted net loss per share:                                                               |  |                            |        |                          
|As reported                                                                                         |  | $                          | 0.48   |                          
|Pro forma                                                                                           |  | $                          | 0.53   |                          



4.    Restructuring and Related Charges



In November 2002, the Company announced a restructuring plan intended to reduce costs and focus its resources on prioritizing, selecting and rapidly advancing its most promising drug candidates. In connection with
this restructuring plan, a charge of approximately $11.0 million was recorded in the fourth quarter of 2002. The cash requirements under the November 2002 restructuring plan were $1.9 million, of which $1.7 million was paid prior to June 30, 2003,
and the remainder will be paid by the end of 2003.



On June 19, 2003, the Company announced a restructuring plan intended to focus resources on continuing to advance its broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development. As a
result of the restructuring plan, the Companys employee base was reduced by approximately 80 personnel, representing approximately 20% of its workforce.



In connection with the June 2003 restructuring plan, a charge of approximately $2.9 million was recorded in the second quarter of 2003,
including $1.8 million related to employee separation costs, $1.0 million of operating lease obligations and $0.1 million of asset impairment costs. The employee separation costs were recorded under Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and included amounts to be paid for severance and related benefits, the services for which had been performed in full as of June 30, 2003. The cash requirements
under the June 2003 restructuring plan were $2.7 million, of which $0.2 million was paid prior to June 30, 2003. The Company expects to pay approximately $1.5 million of its remaining cash requirements related to the June 2003 restructuring plan
during the remainder of 2003. The remaining cash requirements of $1.0 million will be paid through the end of 2008.



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5.    Segment Reporting



The FASB issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes standards for reporting information on operating segments in interim and annual financial statements, and became effective for fiscal years beginning after December 15, 1997. An enterprise
is required to separately report information about each operating segment that engages in business activities from which the segment may earn revenues and incur expenses, whose separate operating results are regularly reviewed by the chief operating
decision maker regarding allocation of resources and performance assessment and which exceeds specific quantitative thresholds related to revenue, profit or loss and assets.



The Company currently operates in two business segments: CuraGen and 454. CuraGen is a genomics-based
pharmaceutical company, which is applying integrated functional genomic technologies and Internet-based bioinformatic systems to discover and develop protein, antibody, and small molecule therapeutics to treat unmet medical needs. 454 is developing
technologies for rapidly and comprehensively analyzing entire genomes. The operations of 454 are run by a separate management team and governed by a separate Board of Directors made up of members of CuraGens management team and Board of
Directors. During the first half of 2003, the Company exceeded the quantitative thresholds described above governing the segment reporting, and as a result, the financial information disclosed herein represents all of the material financial
information related to the Companys reportable business segments. All of the Companys revenues are generated in the United States and all assets are located in the United States.



|                                     |  | June 30,2003                |         |   | December 31,2002          |   |         |      |  |   |        |  
|------------------------------------ |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------ | -
|Total assets:                        |  |                             |         |   |                           |   |         |      |  |   |        |  
|CuraGen                              |  | $                           | 402,446 |   |                           | $ | 437,908 |      |  |   |        |  
|454                                  |  |                             | 19,204  |   |                           |   | 26,157  |      |  |   |        |  
|Intercompany eliminations            |  |                             | (11,264 | ) |                           |   | (15,536 | )    |  |   |        |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|Total                                |  | $                           | 410,386 |   |                           | $ | 448,529 |      |  |   |        |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|                                     |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                     |  | 2003                        |         |   | 2002                      |   |         | 2003 |  |   | 2002   |  
|Revenues:                            |  |                             |         |   |                           |   |         |      |  |   |        |  
|CuraGen                              |  | $                           | 1,695   |   |                           | $ | 3,659   |      |  | $ | 3,639  |  
|454                                  |  |                             |        |   |                           |   |        |      |  |   |       |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|Total                                |  | $                           | 1,695   |   |                           | $ | 3,659   |      |  | $ | 3,639  |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|Operating expenses:                  |  |                             |         |   |                           |   |         |      |  |   |        |  
|CuraGen                              |  | $                           | 22,347  |   |                           | $ | 24,811  |      |  | $ | 38,312 |  
|454                                  |  |                             | 3,752   |   |                           |   | 2,680   |      |  |   | 7,197  |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|Total                                |  | $                           | 26,099  |   |                           | $ | 27,491  |      |  | $ | 45,509 |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|Net loss:                            |  |                             |         |   |                           |   |         |      |  |   |        |  
|CuraGen                              |  | $                           | 21,208  |   |                           | $ | 20,539  |      |  | $ | 35,326 |  
|454                                  |  |                             | 3,699   |   |                           |   | 2,470   |      |  |   | 7,072  |  
|Minority interest in subsidiary loss |  |                             | (1,480  | ) |                           |   | (988    | )    |  |   | (2,829 | )
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  
|Total                                |  | $                           | 23,427  |   |                           | $ | 22,021  |      |  | $ | 39,569 |  
|                                     |  |                             |         |   |                           |   |         |      |  |   |        |  



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CURAGEN CORPORATION AND SUBSIDIARY



Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations



This Managements Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2003 and for the three and six month
periods ended June 30, 2003 and 2002 should be read in conjunction with the sections of our audited condensed consolidated financial statements and notes thereto as well as our Managements Discussion and Analysis of Financial Condition
and Results of Operations that are included in our Annual Report on Form 10-K for the year ended December 31, 2002.



Overview



We are a genomics-based pharmaceutical company. We apply our integrated functional genomic technologies and Internet-based bioinformatic systems to
discover and develop protein, antibody, and small molecule therapeutics to treat unmet medical needs. Our disease areas include obesity and diabetes, oncology, inflammatory diseases, and central nervous system disorders. We are developing protein
drugs on our own behalf, we have established a strategic alliance with Abgenix, Inc. (Abgenix) to develop antibody drugs, and we have established a strategic alliance with Bayer AG (Bayer) to develop small molecule drugs to
treat obesity and adult onset diabetes.



We were incorporated
in November 1991 and, until March 1993, were engaged primarily in organizational activities, research and development of our technologies, grant preparation and obtaining financing. We have incurred losses since inception, principally as a result of
research and development and general and administrative expenses in support of our operations. We anticipate incurring additional losses over the next several years as we focus our resources on prioritizing, selecting and rapidly advancing our most
promising drug candidates. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial.



Our ability to earn revenues and become profitable is dependent primarily on our ability to successfully develop and commercialize pharmaceutical products
based upon our expertise in genomics, our technologies, and our drug development pipeline. Accomplishing this goal also depends in part on our ability to maintain our existing strategic alliances with Abgenix and Bayer, and on our ability to
establish new alliances to aid us in developing and commercializing small molecule therapeutics. We cannot guarantee that any such strategic alliances, either new or existing, will be successful. We have also established a majority-owned subsidiary,
454 Corporation (currently doing business as 454 Life Sciences, or 454), to develop novel technologies for rapidly and comprehensively analyzing entire genomes. We expect that 454 will commercialize these products upon their development,
which may be a future source of revenues for us.



Our failure
to successfully develop and market pharmaceutical products over the next several years would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated from commercial sales of
products developed through the application of our technologies and expertise are not expected for several years, if at all.



Critical Accounting Policies



The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets
and liabilities, revenues and expenses and as such, actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are fully described in Note 1 to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2002.



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##### Table of Contents

Results of Operations



Three and Six Months Ended June 30, 2003 and 2002



Revenue. Collaboration revenue for the three and six months ended June 30, 2003 was $1.7 million and $3.6 million, respectively, a decrease of $2.0
million and $4.9 million, or 54% and 58%, as compared to $3.7 million and $8.5 million for the corresponding periods in 2002. The decreases are attributable to the shift in our focus from revenue generating service agreements to collaborations that
enhance the value of our growing pipeline. Revenue recorded in the three month period ended June 30, 2003 was primarily related to our collaborative arrangements with Alexion Pharmaceuticals (Alexion), Bayer, Pfizer, Inc.
(Pfizer) and Philip Morris, Inc. (Philip Morris) while the same period in 2002 primarily included revenue from our collaborative arrangements with Abgenix and Bayer. Revenue recorded in the six month period ended June 30,
2003 was primarily related to our collaborative arrangements with Alexion, Bayer, Genentech, Inc., Pfizer, and Philip Morris, while the same period in 2002 primarily included revenue from our collaborative arrangements with Abgenix and Bayer.



We expect that 2003 collaboration revenues will continue to
decrease significantly compared to 2002 revenues, unless we receive royalties or milestone payments from products currently under development by our current and former collaborative partners. We will continue to shift our focus from revenue
generating service agreements, and instead pursue strategic research and development alliances to gain access to expertise that is currently unavailable to us. We expect these alliances with pharmaceutical and biotechnology companies to provide us
with access to unique technologies, access to capital, near term revenues, milestone and/or royalty payments, and/or potential profit sharing arrangements. Future revenues will be dependent upon our ability to successfully develop and market
products that may arise from our own internal drug development pipeline, enter into additional alliances, maintain and expand pharmacogenomic and biomarker collaborations, receive royalties and milestone payments from products currently under
development by our current and former collaborators and successfully sell technologies being developed by 454.



Operating Expenses.  Research and development expenses for the three and six months ended June 30, 2003 were $18.4 million and $32.8
million, respectively, compared to $22.2 million and $42.4 million for the same periods in 2002. The decreases of $3.8 million and $9.6 million, or 17% and 23%, were primarily attributable to our corporate restructuring undertaken at the end of
2002, including decreases in lab supplies and reagents, contractual services, depreciation expense and personnel costs, partially offset by a $1.2 million non-cash discovery related expense. Research and development expenses for 2003 are expected to
continue to decrease in comparison to 2002, reflecting the expected reduction in costs as a result of our corporate restructurings undertaken in November 2002 and in June 2003, including decreases in lab supplies and reagents, personnel costs and
depreciation expense partially offset by an expected increase in 454s operating expenses as its operations continue to expand.



General and administrative expenses for the three and six months ended June 30, 2003 decreased $0.5 million and $1.4 million, or 9% and 13%, to $4.8
million and $9.8 million, as compared to $5.3 million and $11.2 million for the same periods in 2002. The decreases were due to the corporate restructuring undertaken in November 2002, including decreased personnel costs, depreciation expenses,
consulting costs and facility repair and maintenance expenses. Additionally, lower legal patent expenses are indicative of our focus shifting from discovery to the advancement of our development efforts. General and administrative expenses for 2003
are expected to continue to decrease in comparison to 2002, reflecting the corporate restructurings undertaken in November 2002 and in June 2003 including decreases in rent expense, consulting costs and facility repairs and maintenance expenses.



Restructuring and related
charges.  Restructuring and related charges of approximately $2.9 million were incurred in the second quarter of 2003 as a part of our June 2003 restructuring plan which was intended to focus resources on continuing to advance our
broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development. As a result of the June 2003 restructuring plan, our employee base was reduced by approximately 80 personnel, representing approximately
20% of our workforce. In connection with this restructuring plan, we incurred $1.8 million related to employee separation costs, $1.0 million of operating lease obligations and $0.1 million of asset impairment costs. The employee separation costs
were recorded under Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities and included amounts to be paid for severance and related benefits, the services for which had been
performed in full as of June 30, 2003. The cash requirements under the June 2003 restructuring plan were $2.7 million, of which $0.2 million was paid prior to June 30, 2003. We expect to pay approximately $1.5 million of our remaining cash
requirements related to the June 2003 restructuring plan during the remainder of 2003. The remaining cash requirements of $1.0 million will be paid through the end of 2008.



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Interest Income (Expense), Net.  Interest income for the three and six months ended June
30, 2003 of $2.1 million and $4.4 million, respectively, decreased $0.9 million and $1.6 million, or 30% and 27%, as compared to $3.0 million and $6.0 million for the corresponding periods in 2002. The decreases in interest income were primarily due
to lower yields in our investment portfolio and a decrease in cash and investment balances during 2003. We earned an average yield of 2.13% in the second quarter of 2003 as compared to 2.57% during the same period in 2002, and earned an average
yield of 2.20% in the first six months of 2003 as compared to 2.49% during the same period in 2002. We anticipate that interest income for the remainder of 2003 will continue to decrease as cash and investment balances are utilized in the normal
course of operations.



Interest expense for the three and six
months ended June 30, 2003 of $2.5 million and $4.9 million, respectively, represented decreases of $0.1 million and $0.2 million, or 4% and 4%, as compared to $2.6 million and $5.1 million for the three and six months ended June 30, 2002. Interest
expense was primarily attributable to our convertible subordinated debt which we issued on February 2, 2000. We expect that interest expense will remain relatively constant in 2003.



Income Tax Benefit (Expense).  For the three and six months ended June 30, 2003, we recorded a Connecticut
income tax expense of $0.1 million and $0, respectively, as compared to an income tax benefit of $0.4 million and $0.9 million for the same periods in 2002. The decreases in the income tax benefit of $0.5 million and $0.9 million, or 125% and 100%,
were due to the State of Connecticut budget impasse at June 30, 2003 which resulted in the lack of a guarantee that there would be an ability for us to recognize an income tax benefit for years beginning on or after January 1, 2003. We originally
recorded the income tax benefit for the first quarter of 2003 under Connecticut legislation, which allowed companies to elect to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense
credit, in exchange for forgoing carryforward of the credit. However, during the budget discussions in June 2003 this legislation was allowed to expire effective December 31, 2002.



We determine our income taxes using the asset and liability method. Realization of deferred tax assets is dependent on
future earnings, if any, the timing and amount of which are uncertain. As we have no prior earnings history, a valuation allowance in an amount equal to the deferred income tax assets has been established to reflect these uncertainties.



Minority Interest in Subsidiary Loss.  Minority interest
in subsidiary loss for the three and six months ended June 30, 2003, which is the portion of 454s loss attributable to stockholders of 454 other than us, was $1.5 million and $2.8 million, respectively, as compared to $1.0 million and $1.7
million for the same periods in 2002. The increases of $0.5 million and $1.1 million, or 50% and 65%, were primarily due to 454s additional personnel costs, increased purchases of laboratory supplies, increased equipment depreciation expense
and payments for consulting and contractual services. During 2003, losses attributed to the minority ownership in 454 are expected to increase as 454 continues to make significant progress in developing new technologies as compared to 2002.



Net Loss.  For the three and six months ended
June 30, 2003, we reported a net loss of $23.4 million and $39.6 million, respectively, or $0.48 per share and $0.80 per share as compared to $22.0 million and $41.7 million or $0.45 per share and $0.85 per share for the same periods in 2002. Our
net loss for 2003 is expected to continue decreasing, as compared to 2002, as a result of the recent corporate restructurings undertaken in November 2002 and in June 2003. Since inception, we have incurred operating losses, and as of June 30, 2003,
we had an accumulated deficit of $254.6 million. To date, we have not paid any federal income taxes.



Liquidity and Capital Resources



As of June 30, 2003, we had $378.6 million in cash and investments as compared to $414.8 million as of December 31, 2002. The decrease of $36.2 million in cash and investments during the first six months of 2003 was primarily a result of
additional operating losses in support of our research and development activities, acquisitions of additional property and equipment and payment of interest to the holders of our convertible subordinated debt issued in February 2000. We have
financed our operations since inception primarily through public offerings, our convertible subordinated debt offering, revenues received under our collaborative research agreements, private placements of equity securities, government grants, and
capital leases. As of June 30, 2003, we had recognized $102.7 million of cumulative sponsored research revenues from collaborative research agreements and government grants.



Our cash investing activities have consisted primarily of acquisitions of equipment and expenditures for leasehold
improvements and net outflows from purchases and maturities of short-term investments and marketable securities. At June 30, 2003, our gross



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investment in lab and office equipment, computers, land and leasehold improvements since inception was $45.2 million. At June 30, 2003, equipment with a
gross book value of $3.0 million secured our equipment financing facilities. We had approximately $2.0 million in material commitments for capital expenditures at June 30, 2003.



Restructuring and related charges of approximately $13.9 million were incurred in 2002 and 2003 as a part of our corporate
restructuring plans undertaken in November 2002 and in June 2003, which were intended to reduce costs and continue to advance our broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development. The
cash requirements under the restructuring plans totaled $4.6 million, of which $1.9 million was paid prior to June 30, 2003. Of the remaining cash requirements, approximately $1.7 million will be paid by the end of 2003. The remaining cash
requirements of $1.0 million will be paid through the end of 2008.



In accordance with our investment policy, we are utilizing the following investment objectives for cash and investments: (1) investment decisions are made with the expectation of minimum risk of principal loss, even with a modest penalty in
yield; (2) appropriate cash balances and related short-term funds are maintained for immediate liquidity needs, and appropriate liquidity is available for medium-term cash needs; and (3) maximum after-tax yield is achieved.



Cash Flows For The Six Months Ended June 30, 2003



Operating Activities.  Net cash used in operating
activities was $31.9 million for the six months ended June 30, 2003 and was primarily due to the net cash loss from operations of $37.3 million, offset by decreases in income taxes receivable of $0.9 million and prepaid expenses of $0.5 million, and
increases in accounts payable of $2.0 million and accrued restructuring and related charges of $2.2 million.



Investing Activities.  Net cash provided by investing activities was $25.7 million for the six months ended June 30, 2003 and was
primarily due to net inflows from purchases and maturities of short-term investments and marketable securities of $29.5 million offset by acquisitions of property and equipment of $3.3 million, including expenditures for leasehold improvements and
payments of intangible assets of $0.5 million.



Financing
Activities.  Net cash used in financing activities was $0.9 million for the six months ended June 30, 2003 and primarily included payments on capital lease obligations.



Future Liquidity



Sources of Liquidity.  During 2003, we expect to continue to fund our operations through a combination of the following sources: cash and
investment balances; collaboration revenue; gross interest income; and potential public securities offerings and/or private strategic-driven common stock offerings.



Uses of Liquidity.  Throughout 2003, we plan to continue making substantial investments in our emerging
preclinical and clinical drug pipeline. In that regard, we foresee the following as significant uses of liquidity: salaries and benefits, supplies and reagents, contractual services including costs incurred related to our manufacturing agreement
with Abgenix for CR002, clinical trials on our protein therapeutic CG53135, manufacturing costs related to Phase II production for our protein therapeutic CG53135, legal expenses in support of the development of our intellectual property portfolio,
and interest expense related to payments made to the holders of our convertible subordinated debt issued in February 2000. In addition, we anticipate that we will also incur additional capital expenditures in 2003, primarily for the purchase of
equipment and leasehold improvements at our New Haven and Branford research facilities and administrative offices, including the expansion of our existing protein production laboratory and growth in 454 operations. At June 30, 2003, we had
approximately $0.5 million of purchase obligations which we will be required to pay within the next twelve months.



We believe that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements through 2004. Our
operating and capital expenditures are considered to be crucial to our future success, and by continuing to make strategic investments in research and development programs, we believe that we are building substantial value for our shareholders. The
adequacy of our available funds to meet our future operating and capital requirements, including our $150.0 million of 6% convertible subordinated debentures due February 2, 2007, will depend on many factors, including the progress



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we make in our drug development and pharmacogenomic programs, the magnitude of these programs, the success of our strategic research and development alliance
partners in developing and commercializing drugs from existing programs and our ability to establish additional collaborative and licensing arrangements. While we will continue to explore alternative sources for financing our business activities,
including the possibility of public securities offerings and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources of liquidity will be available when needed or that our actual cash requirements
will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development
and testing of products under development. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan,
which is to successfully develop and market pharmaceutical products.



Minority Interest in Subsidiary



As of June
30, 2003, minority interest in subsidiary was $7.3 million. Minority interest in subsidiary is related to the establishment of 454 during 2000 and reflects the initial minority shareholders capitalization less a gain recognition of $3.9
million as a result of our contribution of technology to 454, less the minority shareholders portion of losses incurred to date. The loss attributed to the minority ownership in 454 is expected to continue to increase during 2003, as
454s expenditures associated with technology development continue to increase, and therefore, the minority interest in subsidiary is expected to decrease during the remainder of 2003.



Certain Factors That May Affect Results of Operations



This report contains forward-looking statements that are subject to certain
risks and uncertainties. These include statements regarding: (i) our intention to apply APB 25 to our stock-based compensation awards to employees, (ii) our ability to pay $1.7 million of our cash requirements for restructuring charges by the end of
2003 and the remainder through the end of 2008, (iii) our ability to apply our integrated functional genomic technologies and Internet-based bioinformatic systems to discover and develop pharmaceutical products to treat unmet medical needs, (iv) our
expectation that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial, (v) the ability of our subsidiary, 454 Corporation, to commercialize products upon their development and create a future source of revenues
for us, (vi) our expectation that research and development expenses for 2003 will continue to decrease in comparison to 2002, (vii) our expectation that general and administrative expenses for 2003 will decrease slightly in comparison to 2002,
(viii) our expectation that interest income for the remainder of 2003 will continue to decrease as cash and investment balances are utilized in the normal course of operations, (ix) our expectation that interest expense will remain relatively
constant in 2003, (x) our expectation that losses attributed to the minority ownership in 454 Corporation will continue to increase in 2003 as 454 continues to make progress in developing new technologies as compared to 2002, (xi) our expectation
that the net loss for 2003 will decrease slightly as compared to 2002, (xii) our ability to fund our operations through a combination of sources during 2003 and to make substantial investments in our emerging preclinical and clinical drug pipeline,
and (xiii) our belief that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements through 2004. Such statements are based on managements current expectations and are subject to a
number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not
differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following: our expectation that we will incur operating losses in the near future, our stage of
development as a genomics-based pharmaceutical company, uncertainties of preclinical and clinical testing and trials, government regulation and healthcare reform, technological uncertainty and product development risks, product liability exposure,
uncertainty of additional funding, our history of incurring losses and the uncertainty of achieving profitability, reliance on research collaborations and strategic alliances, competition, the ability of our third party manufacturers to deliver
materials on a timely basis and to comply with applicable regulatory requirements, including the FDAs current Good Manufacturing Practices, or GMP, patent infringement claims against our products, processes and technologies, our ability to
protect our patents and proprietary rights and uncertainties relating to commercialization rights. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 for a more detailed description of these risks. We disclaim
any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.



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Recently Enacted Pronouncements



In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS 149) which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of SFAS 149 are effective for financial statements issued after June 30,
2003, and the adoption of SFAS 149 did not have a material effect on our financial statements.



In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150)
which requires that an issuer classify a financial instrument that is within its scope as a liability, or an asset in some circumstances, where those instruments were previously classified as equity. The provisions of SFAS 150 are effective for
financial statements issued after May 15, 2003, and the adoption of SFAS 150 did not have a material effect on our financial statements.



Item 4.    Controls and Procedures



| | (a) |  | Evaluation of Disclosure Controls and Procedures
| | --- |  | ------------------------------------------------



As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were adequate and effective to ensure that material information relating to us, including our consolidated subsidiaries,
was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.



| | (b) |  | Changes in Internal Controls
| | --- |  | ----------------------------



The CEO and CFO have indicated that there have been no changes in our internal controls over financial reporting, identified in connection with the
above-mentioned evaluation of such internal controls that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



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Part IIOther Information



Item 4.    Submission of Matters to a Vote of Security Holders



We held our annual meeting of shareholders on May 28, 2003, and the following matters were voted on at that meeting:



|1. |  | The election of Ronald M. Cresswell, Ph.D. and Vincent T. DeVita, Jr., M.D. as Class II Directors, to serve for a three-year term of office or until their respective successors have
been elected. The following chart shows the number of votes cast for or withheld:
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|DIRECTOR                     |  | FOR        |  | WITHHELD 
|---------------------------- |  | ---------- |  | ---------
|Ronald M. Cresswell, Ph.D.   |  | 43,041,361 |  | 2,186,893
|Vincent T. DeVita, Jr., M.D. |  | 43,603,123 |  | 1,625,131



Our current Directors
are Ronald M. Cresswell, Ph.D., Vincent T. DeVita, Jr., M.D., David R. Ebsworth, Ph.D., John H. Forsgren, Robert E. Patricelli, J.D., Jonathan M. Rothberg, Ph.D. and Patrick J. Zenner.



|2. |  | The proposal to increase by 3,500,000 shares the aggregate number of shares of the Companys Common Stock, $0.01 par value per share, for which stock options and stock awards
may be granted under the Companys 1997 Employee, Director and Consultant Stock Plan. The following chart shows the number of votes cast for or against, as well as the number of abstentions and broker nonvotes:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|FOR        |  | AGAINST    |  | ABSTAIN
|---------- |  | ---------- |  | -------
|22,509,471 |  | 10,783,904 |  | 155,724



Item 6.    Exhibits and Reports on Form 8-K



A.    Exhibits



|             | 
|------------ | 
|@Exhibit 3.1 | 
|             | 
|Exhibit 3.2  | 
|             | 
|#Exhibit 3.3 | 
|             | 
|Exhibit 10.1 | 
|             | 
|Exhibit 31.1 | 
|             | 
|Exhibit 31.2 | 
|             | 
|Exhibit 32   | 

---

|@ |  | Previously filed with the Commission as Exhibit 3.3 to, and incorporated herein by reference from, the Registrants Registration Statement filed on Form S-1, File No.
333-38051.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|# |  | Previously filed with the Commission as Exhibit 3.3 to, and incorporated herein by reference from, the Registrants Annual Report on Form 10-K for the year ended December 31,
2002, File No. 000-23223.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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B.    Reports on Form 8-K



On April 24, 2003, we furnished a report on Form 8-K under Item 9, Regulation FD Disclosure, announcing
financial results for the first quarter of 2003. In accordance with the procedural guidance in SEC Release No. 33-8216, the information in the Form 8-K and the Exhibit attached to the Form 8-K was furnished under Item 9. Regulation FD
Disclosure rather than under Item 12. Disclosure of Results of Operations and Financial Condition.



On June 20, 2003, we filed a report on Form 8-K under Item 5, Other Events and Regulation FD Disclosure, announcing a corporate restructuring
to focus resources on continuing to advance our broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development.



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|Dated: August 12, 2003 |  |  |  | CuraGen Corporation
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CURAGEN CORPORATION



EXHIBIT INDEX



No.

|             | 
|------------ | 
|@Exhibit 3.1 | 
|             | 
|Exhibit 3.2  | 
|             | 
|#Exhibit 3.3 | 
|             | 
|Exhibit 10.1 | 
|             | 
|Exhibit 31.1 | 
|             | 
|Exhibit 31.2 | 
|             | 
|Exhibit 32   | 

---

|@ |  | Previously filed with the Commission as Exhibit 3.3 to, and incorporated herein by reference from, the Registrants Registration Statement filed on Form S-1, File No.
333-38051.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|# |  | Previously filed with the Commission as Exhibit 3.3 to, and incorporated herein by reference from, the Registrants Annual Report on Form 10-K for the year ended December 31,
2002, File No. 000-23223.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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